Net Present Value (NPV)
The difference between the present value of cash inflows and outflows — used to evaluate investment decisions.
Net Present Value calculates whether an investment creates or destroys value by summing the present value of all expected cash inflows and subtracting the initial investment cost.
If NPV is positive, the investment returns more than the required rate of return and should theoretically be accepted. If negative, it destroys value relative to the discount rate used.
NPV is the decision-making counterpart to DCF. While DCF answers "what is this worth?", NPV answers "should we do this?" It's used to evaluate capital expenditure decisions, project investments, lease-vs-buy analyses, and expansion plans.
The discount rate used in NPV calculations should reflect the risk of the specific project, not just the company's overall WACC. Higher-risk projects warrant higher discount rates, making their NPV harder to achieve — which is the intended effect.
Related Terms
A valuation method that estimates the present value of a business based on its projected future cash flows.
The discount rate at which the NPV of an investment equals zero — representing its expected annualised return.
The blended cost of a company's debt and equity financing, used as the discount rate in valuations.